Corporate Governance

The Combined Code on Corporate Governance

 

The Company has applied the principles set out in Section 1 of the UK Corporate Governance Code issued by the Financial Reporting Council in June 2010 (“the Code”). Section 1 of the Code applies to companies and this statement, together with the Directors’ Remuneration Report set out on pages 52 to 59, explains how the Company applied its principles throughout the year ended 30 June 2011. 

The Board of directors

The Board, which is headed by the non-executive Chairman, Michael Harper, also included four other non-executive directors and three executive directors as at 30 June 2011.  Peter Gilchrist was appointed non-executive director on 1 December 2010.

The role of the Board is to provide entrepreneurial leadership of the Company within a framework of effective controls which enables risk to be assessed and managed. The Board sets strategic aims, reviews management performance and ensures that the necessary financial and human resources are in place to meet its objectives and its obligations to its shareholders and others. The Board has agreed a schedule of matters reserved for the Board, which includes oversight of risk, approval of the Group’s strategy, acquisitions and disposals of businesses, the annual financial budgets, major capital expenditure, major proposals and certain key policies. The Board approves interim dividends and recommends final dividends. It receives recommendations from the Audit Committee in relation to the appointment, re-appointment or removal of auditors, their remuneration and the policy relating to non-audit services. From the Nominations Committee it receives recommendations regarding Board appointments. The Board agrees the policy for executive directors’ remuneration with the Remuneration Committee and determines fees paid to non-executive directors other than the Chairman. The full list of matters reserved for the Board and the terms of reference of its sub-committees are available on the Company’s website. Board papers are circulated before Board meetings in sufficient time to allow proper consideration of the matters tabled. The Board delegates to management, through the Chief Executive Officer, the implementation of strategy, the overall performance of the Group and the management of the business in a fit and proper manner in keeping with the Company’s agreed values and policies.

The division of responsibilities between the Chairman and the Chief Executive Officer is clearly defined and has been approved by the Board. The Chairman’s primary responsibility is ensuring the effectiveness of the Board and setting its agenda. The Chief Executive has direct responsibility for the Group on a day-to-day basis and is accountable to the Board for the financial and operational performance of the Group. The Chief Executive chairs the Executive Committee which meets formally at least three times each year and includes the Executive Directors of the Board. The Executive Committee is primarily responsible for developing corporate strategy. The Chief Executive also chairs the Ricardo Operating Board which deals with operational issues and delivers corporate strategy. It formally meets quarterly and includes the Managing Directors of subsidiary companies and other senior executives. The minutes of the meetings of both the Ricardo Operating Board and the Executive Committee are circulated to the Board.

The performance of the Board is evaluated internally each year by a rigorous process based around  a detailed questionnaire which each director completes. The areas covered include: the quality of leadership and the setting of strategy and values; the Board’s setting of its own objectives and review of its progress against those objectives; the composition of the Board, the appropriateness of its skill level and mix of experience and the effectiveness of the various roles; how well the Board members work and communicate together and with others; the appropriateness of Board and senior management succession planning and the induction and training of Board members; the way Board meetings are conducted, the content of those meetings and related processes; the effectiveness of the various committees; and the appropriateness of its risk and control frameworks. The questionnaire also reviews the performance of each individual director, including the Chairman. This information was used by the Chairman as part of his evaluation of the directors and in discussing their personal development. The results of the questionnaire are analysed and reviewed by the Board and appropriate improvements agreed and implemented.

For the year ended 30 June 2011 the Board set itself objectives including supporting the executive in achieving budget performance plans, finalising the 5 year strategic objectives,  maintaining focus on talent management and succession planning, completing the addition of a non-executive director with defence experience to the Board and focusing on key risks and mitigations plans.

In support of these objectives various strategy review days have been held during the year. Updates on talent management have been provided to the Board and the programme is progressing to plan. Risk management improvements have been made including improved monitoring processes and identification of risks to the business both before and after related mitigating controls and actions.

Each director is appraised annually through an appraisal process. The Chief Executive Officer is appraised by the Chairman, the other executive Board members are appraised by the Chief Executive Officer, and the non-executive Board members other than the Chairman are appraised by the Chairman. Under the leadership of the senior independent director, having consulted with the executive directors, the non-executive Board members hold a meeting without the Chairman being present to appraise the Chairman’s performance.

A new director, on appointment, is briefed on the activities of the Company, and receives a full, formal and tailored induction. Non-executive directors including the Chairman are briefed on issues arising at Board meetings if required and non-executive directors have access to the Chairman and the executive directors at any time. Ongoing information is provided as needed, including presentations by the operating units on specific aspects of the business, supplemented by visits to key locations and meetings with key senior executives. Directors are updated continually on the Group’s business with monthly performance packs and by means of Board presentations on matters including insurance, pensions, social, ethical, environmental and health and safety issues. In the furtherance of their duties or in relation to acts carried out by the Board or the Company, each director has been informed that they are entitled to seek independent professional advice at the expense of the Company. In accordance with the Company’s Articles of Association, directors are granted an indemnity from the Company in respect of liabilities incurred as a result of their office, to the extent permitted by law. In respect of those liabilities for which the directors may not be indemnified, the Company maintained a directors’ and officers’ liability insurance policy throughout the year. Although their defence costs may be met, neither the Company’s indemnity nor insurance provides cover in the event that the director is proved to have acted fraudulently or dishonestly. Each director has access to the services of the Company Secretary if required.

 

 

Board
meetings

Committee meetings

Audit

Remuneration

Nomination

Number of meetings in the year

8

3

4

2

Number attended by each member

 

 

 

 

Michael Harper

8

3

4

2

Hans Schöpf

8

3

4

2

David Hall

8

3

4

2

Ian Lee

8

3

4

2

Peter Gilchrist  (appointed 1 December 2010)

4

2

1

Dave Shemmans

8

2

Paula Bell

8

Mark Garrett

7

 

The non-executive directors including the Chairman are considered by the Board to be independent of management and are free to exercise independence of judgement. They have never been employees of the Company nor have they participated in any of the Company’s share schemes, pension schemes or bonus arrangements. They receive no other remuneration from the Company other than the directors’ fees disclosed and travel expenses.

From 1 October 2008, there has been a requirement that directors must avoid a situation where they have, or can have, a direct or indirect interest that conflicts, or possibly may conflict, with the Company’s interests. Directors of public companies may authorise conflicts and potential conflicts, where appropriate, if a company’s Articles of Association permit and shareholders have approved appropriate amendments.

Procedures have been put in place for the disclosure by directors of any such conflicts and also for the consideration and authorisation of these conflicts by the Board. The procedures allow for the imposition of limits or conditions by the Board when authorising any conflict, if they think this is appropriate.  No conflicts have been reported during the year under review.

The Board met regularly throughout the year with ad hoc meetings also being held. The table above shows the number of scheduled Board meetings (excluding those held to deal with minor administrative or time-critical matters) and Audit, Remuneration and Nomination Committee meetings held during the year and the attendance of each director.

Directors are subject to election at the Annual General Meeting following their appointment and to annual re-election.

The Chairman met during the year with the other non-executives and without the executive directors being present. David Hall is the senior independent director who is available to shareholders if contact through normal channels is inappropriate or has failed to resolve an issue.

Internal control and risk management

The Board is responsible for the Group’s system of internal controls and risk management systems and for reviewing their effectiveness. Such systems are designed to manage rather than eliminate the risk of failure to achieve business objectives and can only provide reasonable and not absolute assurance against material misstatement or loss.

Each part of the Group highlights potential financial and non-financial risks which may impact on the business as part of the monthly management reporting procedures. The Board receives these monthly management reports and monitors the position at Board meetings.

As part of the risk management process, directors and senior managers are required to certify on a bi-annual basis that they have established effective controls to manage risk and to comply with legislation and Group procedures. Procedures are in place to ensure that effective control and risk management is embedded in the Group and that the Group is in a position to react as appropriate as new risks arise. The Board confirms that there are ongoing processes for identifying, evaluating and mitigating the significant risks faced by the Group. The processes have been in place during the year under review and up to the date of approval of the Annual Report and Accounts.

The Group’s internal control and monitoring procedures include:

Clear responsibility on the part of line and financial management for the maintenance of good financial controls and the production of accurate and timely management information;

The control of key financial risks through clearly laid down authorisation levels and appropriate segregation of accounting duties, the control of key project risks through project delivery and review systems and the control of other key business risks via a number of processes and activities recorded in the Group’s risk register;

Detailed monthly forecasting and reporting of trading results, balance sheets and cash flows, with regular review by management of variances from budget;

Reporting on compliance with internal financial controls and procedures by Group internal audit; and

Review of reports issued by the external auditors.

In the Board’s view, the information it received was sufficient to enable it to review the effectiveness of the Company’s system of internal control in accordance with the UK Corporate Governance Code.

The Audit Committee

The Audit Committee is established by, and is responsible to, the Board. It has written terms of reference. Its main responsibilities are:

To monitor and be satisfied with the truth and fairness of the Company’s financial statements before submission to the Board for approval, ensuring their compliance with the appropriate accounting standards, the law and the Listing Rules of the UK Listing Authority;

To review the Company’s internal financial controls and internal control and risk management systems, and to review the effectiveness of the internal audit function and ensure that it is adequately resourced;

To make recommendations to the Board in relation to the appointment and re-appointment of the external auditors and their remuneration, before appointment or re-appointment by the shareholders in general meeting, and to review the scope and planning of the audit and be satisfied with the auditors’ independence, objectivity and effectiveness on an ongoing basis; and

To implement the policy relating to any non-audit services performed by the external auditors.

Ian Lee was appointed as non-executive director on 1 August 2008 and Chairman of the Audit Committee on 18 November 2008. Ian is 64 years old. He is a former senior partner of Ernst & Young LLP in Glasgow. He was a member of the Ernst & Young governing Council for six years, and was a member of the firm’s audit committee. He was the Convener of the Institute of Chartered Accountants of Scotland Audit and Assurance Committee. Ian was a non-executive director and chairman of the audit committee of Clyde Process Solutions plc from 2007 to February 2011, is currently a non-executive director, Vice Chair and member of the audit committee of NHS Greater Glasgow and Clyde Board and has recently been appointed as independent external member of the audit committee of the Student Loans Company. He therefore has recent and relevant experience.

The other members of the Audit Committee: Michael Harper, David Hall, Hans Schöpf and Peter Gilchrist are independent non-executive directors and have gained wide experience in regulatory and risk issues. Appointments to the Audit Committee are made by the Board on the recommendation of the Nomination Committee, which takes into account the particular skills and attributes required to fulfil particular roles. The Audit Committee is authorised by the Board to seek and obtain any information it requires from any officer or employee of the Company and to obtain external legal or other independent professional advice as is deemed necessary by it. Audit Committee meetings are attended by the Chief Executive Officer, the Group Finance Director and the Chief Operating Officer where the Chairman of the Audit Committee considers it appropriate.

Meetings of the Audit Committee were held three times in the year and include the review of the scope of the external and internal audit, ensuring compliance with regulatory requirements in the Company’s overseas subsidiaries, receiving observations arising from work in relation to internal control and the effectiveness of the external audit, and to review and provide recommendations to the Board in relation to half-year and year-end financial statements. The external auditors are invited to all meetings and meet with the Audit Committee without management being present at least once a year. The Audit Committee meeting in September carries out a full review of the year-end financial statements and of the audit, using as a basis reports prepared by the Group Finance Director and the external auditors and taking into account any significant accounting policies, any changes to them and any significant estimates or judgements. Questions are asked of management of any significant or unusual transactions where the accounting treatment could be open to different interpretations. A similar, but less detailed review, is carried out in February when the Interim Report is considered.

The Audit Committee receives reports from management and internal audit on the effectiveness of the system of internal controls and risk management systems. The Chairman of the Audit Committee meets regularly with the Head of Internal Audit and executive management on matters of risk. The Committee also receives from the external auditors a report of matters arising during the course of the audit which the auditors deem to be of significance for the Audit Committee’s attention. 

The internal audit function is centrally managed. Internal audits are led by suitably skilled staff from head office or parts of the business independent from the business or function being audited, and are resourced by staff from around the Group with suitable skills, experience and independence for the area they are auditing. Where relevant, external specialists are used to supplement internal resources where specialist knowledge is required. This approach not only ensures independence in the process but also the relevance of the recommendations and the sharing of best practice around the Group.

As part of the annual process the Audit Committee’s review includes:

The internal audit process, the audit plan and resources;

The internal audit reports management’s response to the findings and recommendations;

Meetings with the Head of Internal Audit without management being present and the Head of Internal Audit is invited to attend audit committees where considered appropriate.

 The Audit Committee considers that the internal audit process is an effective tool in the overall context of the Company’s risk management system.

Internal audit scope includes a review of compliance with Group policies, including on established whistle-blowing, ethics (including Bribery Act related matters) and fraud prevention  policies.  The whistle-blowing policy is designed to deal with concerns, which must be raised without malice and in good faith, in relation to specific issues which are in the public interest and which fall outside the scope of other Company policies and procedures. The whistle-blowing policy is overseen by the Chairman of the Audit Committee, has been reviewed during the year and is promoted via the staff briefing process and the Company’s intranet site. There are no matters to disclose during the year under review.

The external auditors are required to give the Audit Committee information about policies and processes for maintaining their independence and compliance with requirements regarding the rotation of audit partners and staff. The Audit Committee considers all relationships between the external auditors and the Company to ensure that they do not compromise the auditors’ judgement or independence, particularly with the provision of non-audit services where a policy relating to these has been agreed by the Board. Essentially the external auditors would be excluded from carrying out non-audit services if they are put in the position of auditing their own work, making management decisions for the Company, if a mutual interest between the Company and the auditors is created, or if the auditors take on the role of an advocate for the Company. If the external auditors carry out non-audit services and the cost of these services is estimated to exceed £50,000 or in aggregate more than 100 percent of the audit fees, prior approval by the Audit Committee is required. The split between audit and non-audit fees for the year ended 30 June 2011 and information on the nature of non-audit fees appear in note 4 to the accounts.

Both the Board and the external auditors have for many years had safeguards in place to avoid the possibility that the auditors’ objectivity and independence could be compromised. Our policy in respect of services provided by the external auditors is as follows:

Audit-related services – the external auditors are invited to provide services which, in their position as auditors, they must or are best placed to undertake. This includes review of the interim results and any other review of the accounts for regulatory purposes; assurance work related to compliance and corporate governance, including high level controls; work in connection with listing particulars and prospectuses (if required); regulatory reviews or reviews commissioned by the audit committee; and accounting advice and reviews of accounting standards.

Tax consulting – in cases where they are best suited, we use the external auditors provided that such advice does not conflict with the external auditors’ statutory responsibilities and ethical guidance.

General consulting – there may be occasions when the external auditor is best placed to undertake other accounting, advisory and consultancy work on behalf of the Company due to their in-depth knowledge of the Company. However, the following are specifically prohibited:

Work related to accounting records and financial statements that will ultimately be subject to external audit;

Management of, or significant involvement in, internal audit services;

Secondments to management positions that involve any decision‑making;

Any work where a mutuality of interest is created that could compromise the independence of the external auditor; and

Any other work which is prohibited by UK ethical guidance.

The Audit Committee has considered the effectiveness of the external auditors which included obtaining a report on the audit firm’s own internal quality control procedures, consideration of the audit firm’s annual transparency report and review of an internal questionnaire completed by senior and relevant Finance staff. In addition, the Audit Committee considers the risks associated with the audit firm withdrawing from the market, the proposed fee structure and the audit engagement terms for the forthcoming year. The Audit Committee has recommended to the Board that the reappointment of the external auditors be proposed to shareholders at the 2011 Annual General Meeting.

The Remuneration Committee

The Remuneration Committee, which is chaired by David Hall, comprises the non-executive directors including the Chairman and is described in the Directors’ remuneration report on pages 52 to 59, which is the subject of a vote by shareholders at the 2011 Annual General Meeting.

 

The Nomination Committee

The Nomination Committee, having evaluated the balance of skills, knowledge and experience on the Board, makes recommendations to the Board of executive and non-executive appointments. Before such recommendations are made, descriptions of the roles and skills required in fulfilling these roles are prepared for particular appointments. To attract suitable candidates, appropriate external advice is taken and interviews conducted by at least two members of the Nomination Committee to ensure a balanced view. When an appointment of a non-executive director is made, a formal letter is sent setting out clearly what is expected regarding time commitment, committee membership and involvement outside Board meetings. The chosen candidate is required to disclose to the Board any other significant commitments before the appointment can be ratified. The Committee has written terms of reference, and comprises Michael Harper (Chairman), the other non-executive directors (Ian Lee, Hans Schöpf, David Hall and Peter Gilchrist) and Dave Shemmans (Chief Executive Officer) and meets at least once a year and at other times as appropriate. The Chairman of the Committee is the Chairman of the Board, Michael Harper, except when a new Chairman of the Board is being sought, when it is the senior independent director, David Hall. The leadership needs and succession planning of the Company are regularly monitored, as are the size and structure of the Board, with consideration being given to the training needs of the executive and non-executive members. Non-executive directors, including the Chairman, are subject to rigorous review when they are continuing to serve on the Board for any term beyond six  years.

 

Shareholder communications

The Chief Executive Officer and the Group Finance Director regularly meet with institutional shareholders to foster a mutual understanding of objectives. Additionally, the Chairman communicates with key shareholders at least once per annum and both the Chairman, the Senior Independent Director and the Chairman of the Audit Committee are available for discussions with major shareholders if required. Surveys of shareholder opinion are normally carried out following announcements of results and are circulated to the Board. The Annual General Meeting (“AGM”) in November 2010 was attended by all directors in office at the time of the meeting. The directors encourage the participation of all shareholders, including private investors, at the AGM and as a matter of policy the level of proxy votes (for, against and vote withheld) lodged on each resolution is declared at the meeting and displayed on the Company’s website. The Annual Report and Accounts is mailed to shareholders and others who request it and is published on the Company’s website at www.ricardo.com.

 

Liquidity and Going concern

The Company’s policy on funding capacity is to ensure that it always has sufficient long term funding and committed bank facilities in place to meet foreseeable peak borrowing requirements.

The directors have assessed the future funding requirements of the Company and compared it to the level of long-term debt and committed bank facilities. Further details can be found in note 22 of the Financial Statements.

After completing this work, the directors have confidence that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. For this reason they continue to adopt the going concern basis in preparing the Report and Accounts.

Compliance with the Code

The Board confirms that it complied throughout the year ended 30 June 2011 with all relevant provisions contained in section 1 of the UK Corporate Governance Code.


On behalf of the Board

Michael Harper, Chairman

Ian Lee, Chairman of the Audit Committee

23 September 2011

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